Research

This paper studies the impact of the collateral asset liquidity on repo contract terms in the U.S. Triparty Repo Market. To identify the causal effect, I exploit a policy shock to instrument the improvement in liquidity of Agency securities. This policy introduced a penalty charge on settlement fails of Agency securities’ transactions effective from 2012. As a result of the improvement in liquidity caused by the policy, I show an increase in volume and decline in rates on Agency collateral repos. Interestingly, there is a spillover effect on riskier collateral repos - reduction in funding using Corporate Debt collateral alongside a decline in repo rate. Further, cash lenders differentially respond to the policy due to the varied restrictions on the eligible collateral assets. These estimates can be rationalized in a unified supply-demand framework where improvement in Agency liquidity affects the behaviours of the core participants in the repo market.

We make a novel use of U.S. index dividend futures contracts from 2010-2019 to study the effects of monetary policy shocks on dividend growth expectations over different horizons. We find that a tightening forward guidance shock increases (decreases) growth expectations by 0.15%-0.31% (0.03%-0.30%) across the term structure during the ZLB (post-ZLB) period. A tightening LSAP shock reduces growth expectations by 0.1%-0.16% (0.01%-0.81%) in the same period. The results indicate that both traditional monetary policy channel and central bank information channel are at play and that the unconventional tools effect expectations through a combination of these channels in different time periods.